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Effective date and transition

2. An entity need not reassess the lease classification for any expired or existing leases (for example,
all existing leases that were classified as operating leases in accordance with Topic 840 will be
classified as operating leases, and all existing leases that were classified as capital leases in
accordance with Topic 840 will be classified as finance leases).

3. An entity need not reassess initial direct costs for any existing leases.

Definition of a lease

In most cases, reporting entities that choose not to apply these practical expedients will reach the same
conclusions as they did under prior GAAP regarding whether a contract is a lease. In the limited
circumstances where differences exist, the guidance in ASC 842 is likely to result in a nonlease
conclusion when previous GAAP would have concluded a contract was a lease. The practical
expedients should not be applied to grandfather incorrect assessments determined under prior GAAP.
Reporting entities should ensure that an analysis of contracts for embedded leases has been performed
under ASC 840 before using the practical expedient to carry over the conclusions upon adoption of
ASC 842.

EITF No. 01-8, Determining Whether an Arrangement is a Lease, provided guidance for determining
whether an arrangement contains a lease under previous GAAP. The transition provisions of EITF 01-
8 explained that its provisions were effective for arrangements (a) agreed to or committed to, (b)
modified, or (c) acquired in a business combination initiated after the beginning of a reporting entity’s
first reporting period beginning after May 28, 2003. As a result, arrangements at or before the
effective date of EITF 01-8 were grandfathered and companies were not required to determine if such
arrangements were or contained leases under ASC 840.

The leases standard does not address whether or not arrangements that were grandfathered under
EITF 01-8 would continue to be grandfathered when a reporting entity adopts the leases standard. We
believe a reporting entity electing the package of practical expedients would not be required to reassess
whether arrangements grandfathered under EITF 01-8 are or contain leases. However, if a reporting
entity does not elect the package of practical expedients, we believe the entity should assess all
arrangements that were outstanding as of the application date to determine if they are or contain
leases under the new leases guidance, even if such arrangements were previously grandfathered under
EITF 01-8.

Upon adoption of the new leases guidance, a lessor that chooses to adjust comparative periods needs
to consider the interaction of the effective date of the new revenue recognition guidance in ASC 606. A
lessor that chooses to adjust comparative periods should apply the guidance in ASC 606 to contracts
with customers that were previously in the scope of ASC 840 but no longer meet the definition of a
lease under ASC 842 at the date of initial application of ASC 606 in the comparative periods (e.g.,
January 1, 2018 for a calendar yearend public business entity that elects the modified retrospective
approach for adoption of ASC 606). The lessor should apply the guidance in ASC 605 to such contracts
in the comparative periods before the initial application date of ASC 606. Note that this only applies to
financial statements issued after the adoption of the new leases guidance, for example, a public
calendar year-end lessor would apply this to comparative periods presented in its 2019 financial
statements.

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